Why didn’t the appraiser add the ADU in the square footage?

I get this question quite a bit. Why didn’t the appraiser add the square footage of the ADU to the main house? The idea is the accessory dwelling in the backyard should be lumped into the total square footage, and since it wasn’t, maybe the appraiser undervalued the property. Let’s talk about it. I have some market recap stats today too. Any thoughts?

UPCOMING SPEAKING GIGS:
10/18/24 Prime Real Estate (private)
10/22/24 Culbertson and Gray Group (private (I think))
10/23/24 SAFE Credit Union (details TBA)
10/29/24 Orangevale MLS Meeting
11/7/2024 Think Like an Appraiser (3 hours) TBA
11/19/24 Downtown Regional MLS Meeting Q&A 9am
12/5/24 Made 4 More Team (Exporting Data from MLS)

IT’S NOT ATTACHED TO THE HOUSE

To be considered as gross living area (square footage), the area needs to be connected to the house and accessible through the house. If you have to go outside the main living area to enter a separate structure, it is not proper to include as part of the living space of the house according to ANSI standards (“ANSI” stands for “American National Standards Institute”). This means an appraiser should not lump a detached accessory dwelling or other detached areas with the square footage of the main house. Here’s a real example from years ago. I did not include this ADU in the square footage because it was not connected and accessible to the living area of the main house.

USING LOGIC

I know some might say, “Hey, I don’t really care what some national organization says about lumping square footage together or not.” I get it. On one hand this rule seems arbitrary, and it’s always possible we could think differently about this in the future, but let’s step back and use logic. If a homeowner has a 1,500 sq ft house and adds a 1,200 sq ft ADU in the backyard, has it really become a 2,700 sq ft house? I think logic tells us the answer is NO. This is still 1,500 sq ft, but it clearly now has something else that needs to be considered in the value. Maybe it will sell for the same price as other 2,700 sq ft homes, but what if it sold for more or less? It seems like an awkward comparison if we only use larger homes as comps because we’ve basically used non-similar properties to tell us what this home is worth. It’s like using oranges to describe the value of an apple. Show me a home around the same size with an ADU to help support what the market is willing to pay for something like this. That seems like a much better way to support value because we’re comparing apples to apples. Remember, a buyer shopping for a 2,700 sq ft home may not even be able to consider a 1,500 sq ft home because it might not work for the size of the household.

DOESN’T MEAN IT’S WORTH NOTHING

A huge concern is that an ADU cannot count in the value if it is not counted in the square footage, but that’s completely false. Who made that rule anyway? There are many things that are not square footage that can count in the value such as a pool, covered patio, detached garage, driveway, landscaping, hardscape, etc… An appraiser can definitely recognize value for the ADU in the appraisal report by making an adjustment for it.

COST & VALUE AREN’T ALWAYS THE SAME THING

ADUs are all the rage, but they are also really expensive. I just wanted to mention that cost doesn’t always equal value here. If an owner spends $225,000 to construct an ADU on a $600,000 house, that doesn’t automatically mean the house is now worth $825,000. Let’s find comps to tell us what the market is willing to pay for a house with an ADU. That’s the key. On that note, it might be helpful to think of an ADU as a marathon asset that’s going to add value for decades ahead, but when buyers are sprinting to the market, they may not be willing to pay for the full cost of the ADU in one instance. Maybe they will though. This is where we have to look to the comps. All that said, I’ll admit one of the hard parts is it’s not always easy to find good data (and interpreting the data correctly is key too). Here’s a post with some tips for valuing an ADU.

FINDING ACCESSORY DWELLINGS IN MLS

One of the keys for being able to value ADUs is finding them in MLS. In addition to searching the property description for words like “ADU” or “guest quarters,” here is another step. Pull up a map search and hit “search criteria” on the right side, and then select “fields” under the close button. Then pick “other structures” and save. This means you will now be able to use the other structures field whenever opening up a map search. Now, select “other structures” and then “guest house.” That’s what I did here for only six months of sales, and look what came up. In some areas, I would do one year at a time and be unafraid to look at multiple years of data to hopefully find something. Remember, we might not use really old sales as comps, but maybe we can use them as research to understand how buyers have historically behaved. Of course, sometimes the search results are not really showing ADUs, so I’m going to have to eliminate a pool house, she-shed, and other stuff. But at least this gives me something to work with. Sometimes people say stuff like, “Bro, I can’t find any ADUs.” Maybe that’s true. But have you exhausted all the ways you can research in MLS?

ADDING TOGETHER IN MLS

I appreciate when a listing in MLS does not lump the size of the main house and ADU together. It helps everyone when considering comps. Brokers, is it a liability issue to include the square footage together? Or maybe it’s a non-issue? I’d love to hear your input.

I hope this was helpful. Now for some stats.

A MARKET UPDATE

Friends, I have a market update, but I need to confess I got swept up in the Dexter craze since the series is now streaming on Netflix. I’m only on season three though, so no spoilers please.

BRIEF MARKET DESCRIPTION

It’s been a pretty normal fall season as we’re seeing a descent from the spring market with lower volume, more supply, more price reductions, and prices leveling off. This is what we expect to see at the time of year. But the market still has a weird lackluster vibe with such a low number of sales happening. Moreover, we’ve seen sellers come back more than buyers this year, so the housing temperature is definitely not the same as last year (especially for overpriced units). It is taking longer to sell today, but days on market is very close to the pre-2020 normal, so I think there is an adjustment here for sellers and even the real estate community. In other words, don’t expect 2021 speed in 2024. All things said, the market hasn’t become this dynamic hot zone like some maybe expected would happen when the Fed cut rates.

YEAR OVER YEAR STATS

Some smaller counties don’t have much data, so I lumped them into 60-day chunks. One month just isn’t enough (too erratic). I have all these images and more on the STATS tab.

MONTH TO MONTH STATS

I hope this was interesting or helpful.

Questions: Anything to add about accessory dwellings? What are you seeing out there in the market right now? I’d love to hear your take.

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